Financial Transparency Coalition

This blog post is the first in a two-part blog series. In this post, I observe several of the year’s biggest global trends and their relationship to financial transparency. In the second post, I will examine this year’s progress and momentum in global policy on transparency issues.

Rising Income Inequality

In the United States, policymakers across the political spectrum have become increasingly vocal about the rising income inequality. They include Senator Bernie Sanders (I-VT) who called this the “issue of our time,” Senator Rand Paul (R- KY) who admitted income inequality is a problem, and Senator Charles Schumer (D-NY) and President Obama who have lamented our nation’s dwindling middle class, particularly with the growth of the super-rich.

This issue is a global problem, not unique to the United States. The world’s current wealthiest individual is Carlos Slim Helu, a telecom mogul from Mexico—the same nation where nearly half of the population lives in poverty, including 11.5 million men, women and children in extreme poverty.  Likewise, India’s Mukesh Ambani net worth totals $21.5 billion, where nearly one third of the population lives below the poverty line. Meanwhile, income inequality has been on the rise in China. According to Oxfam, the world’s richest 85 people hold as much wealth as the poorest 3.5 million people combined.

Income inequality has bombarded the public consciousness through official reports and the popular media. Of course, this conversation begins with Thomas Piketty’s wildly successful book, Capital in the Twenty-first Century. But others have contributed to a wide discourse, as well. In a successful documentary, Inequality for All, former Labor Secretary Robert Reich called income inequality the civil rights struggle of our time. Meanwhile, the OECD released a report at the end of this year concluding that rising income inequality has weakened economic growth in most developed countries.

The international financial system is both a driver and consequence of inequality. Rising income inequality creates more individuals with the resources and opportunities to send funds abroad, contributing to increasing concentrations of wealth among wealthy tax evaders. Meanwhile tax evasion reduces government revenues and compromises governments’ ability to make investments that alleviate poverty. Illicit financial flows erode governance, constrain domestic investment and economic activity, and reduce governments’ ability to provide social services, such as healthcare and education.

Transboundary Conflicts

From Russia to the Middle East, much of this year has been marred by increasingly violent and grave transboundary conflicts. After protests and violence descended Ukraine into near chaos early this year, former President and Russian Ally Viktor Yanukovych fled the country. Since then, Ukraine has battled loss on many fronts, including by fighting Russian annexation of Crimea, the peninsula south of Ukraine and west of Russia. Meanwhile, in the Middle East, the increasingly powerful and violent ISIS has taken control of hundreds of square miles from western Iraq to Syria’s Mediterranean coast.

More often than not, finance has lurked in the backdrop of these conflicts – most often as a weapon. In response to Russia’s actions, Western nations have placed increasingly tough financial and economic sanctions on both Russian individuals and the economy at large. Meanwhile, as ISIS’s power grew, attention focused on its assets. The terrorist organization has built a massive inventory of cash by robbing anyone from everyday people to Iraq’s central bank. It uses these assets to fund its continued expansion and violence.

In both instances, weaknesses in the global financial system have undermined international security. When it comes to illicit deposits, the international financial system leaks like a sieve. As a result, U.S. and EU financial sanctions against Russia are largely symbolic and of little substance. To effectively tackle ISIS, meanwhile, Western nations must be able to track and combat their financing. However, continued weaknesses in rules on beneficial ownership and money laundering, will thwart law enforcement officials’ ability to respond to these challenges.

The Chinese Century?

International headlines reeled earlier this year when the International Monetary Fund proclaimed that China would pass the United States to become the world’s biggest economy – by one measure, at least. As Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs, put it, this “could very well be the Chinese century.”

As many have pointed out since, however, it does depend on how you look at it. If you use the purchasing power parity method for measuring GDP, then yes, China’s economy is bigger. If you rely on the traditional measure of GDP, then the United States is still bigger by a substantial margin.

On the whole, sorting out which nation is “bigger” according to which yardstick is an academic exercise, and on its own it isn’t particularly informative. However, this debate does raise important questions about the continued challenges of development in China and the eventual question of a rebalancing of global power among these two nations.

In short, China’s economic and political challenges are still too substantial for these official statistics to be too meaningful. China still has a long way to go on government corruption—at both the local and national levels. As the recent report by Global Financial Integrity shows, illicit financial flows from China are still staggering and rising. The nation’s efforts to recover dirty assets, while commendable, are likely to fall far short of actually making a dent in its $125 billion problem.